Budget update: Taxation of environmental land management and ecosystem service markets

Budget update: Taxation of environmental land management and ecosystem service markets

Amongst the flurry of Budget announcements, the Government today published its long-awaited response to the consultation on the taxation of ecosystem service schemes.

This guidance appears to be a positive first step towards establishing a robust tax framework which will help facilitate the ongoing growth of the Natural Capital economy.

We set out the key, headline points below.

Agricultural Property Relief (APR)

  • In a move which will be much welcomed by landowners and advisers alike, the Government have confirmed that they will extend the existing scope of APR to include environmental land management from 6 April 2025.
  • The key points are:
    • Relief will be available where the environmental land management scheme is entered into on or before 6 March 2024 (provided that it remains in place after 6 March 2024), but relief will only be available for lifetime transfers and transfers at death which take place on or after 5 April 2025.
    • Relief will be available for land managed under an environmental agreement with or on behalf of the UK Government, Devolved Administrations, public bodies, local authorities or approved responsible bodies.
    • Relief will continue to be available following the conclusion of an agreement, provided that it continues to be managed in a way which is consistent with the agreement.
    • For the relief to apply, the land in question needs to have been agricultural land for at least 2 years prior to the change of land use, although interestingly one would not have to show that the land had been used for the purposes of agriculture or would have qualified for APR in its own right.
    • Ownership period requirements for APR will not be restarted by land use change.
    • The value of the relief will be based on a special assumption of a restriction as to its current use – presumably, much in the same way as “agricultural” values. Hope and development values will remain part of the open market value, which may have interesting implications for valuers and tax advisers if the open market value of the land extends beyond its “environmental” value (see further below).
    • Farmhouses (and ancillary buildings) will qualify for relief if occupied with, and that occupation is ancillary to, environmental land.
  • The existing (and now long out of date) land habitat provisions set out in Section 124(c) of the Inheritance Tax Act 1984 will be repealed.

Business Property Relief (BPR)

  • There are no proposed changes to the operation of BPR in this context, and the general rules will continue to apply. The availability of BPR will be assessed on a case-by-case basis in the usual way. BPR will continue to be available if the land in question forms part of a wider, composite, trading business (for example, in a “Balfour” context).
  • The Government have also reaffirmed that the activities required to design, create, and maintain schemes falling within the Woodland Carbon Code and the Peatland Carbon Code are trading activities for BPR purposes.
  • However, this guidance does not appear to go far enough to specifically confirm whether or not the activities required to develop and maintain other environmental schemes (including those involving Biodiversity Net Gain and Nutrient Neutrality, for example), would be deemed to be trading for BPR purposes.
  • The activities carried out in each case will need to be carefully considered. However, in the absence of specific guidance, this may remain an area of uncertainty, and it will be interesting to see whether the draft legislation goes some way to redressing this in due course.


  • The underpinning legislation for the VAT Terminal Markets Order (TMO) will be updated, including bringing trades in carbon credits within the scope of VAT and the TMO.

Working group with industry representatives

  • The Government will be establishing a joint HM Treasury and HMRC working group tasked with clarifying the tax treatment of the production and sale of ecosystem service credits and associated units. DEFRA will also provide input.

Potential restrictions to APR

  • The government have decided not to restrict APR to tenancies of at least 8 years. One of the deciding factors was that they felt it may lead to a contraction in the land available for tenant farmers. DEFRA will continue to work with the industry and look to support longer term tenancy agreements which retain flexibility.
  • Environmental Land Management Schemes will also be accessible to tenant farmers, and this includes for tenants on shorter terms, on rolling annual tenancy agreements and on longer terms.
  • Penalties will no longer be applied for tenants who have to exit a scheme early if their tenancy ends unexpectedly.
  • Whilst tenants need to check the terms of their tenancy agreement before applying to SFI, SFI does not require the tenant to gain the landlord’s consent although in the spirit of collaboration, the expectation is that the tenant would communicate with their landlord.
  • DEFRA is also looking to ensure that more options are offered on shorter durations in their combined Environmental Land Management Scheme offer for 2024.


  • The Government have clearly stated that the potential loss of APR should not be a barrier to land use change. This is a very welcome move and reassures landowners that they should not be forced to choose between (1) using their land in environmentally friendly ways for economic gain on the one hand and (2) the potential loss of valuable APR on the other. The guidance makes sense and seems to suggest that the legislation will follow the current APR framework closely, with ownership periods, farmhouses and ancillary buildings all covered. Draft legislation will be embodied in a future Finance Act, and we await sight of that with interest.
  • That said, there is an argument to say that the change will not come soon enough – the relief will not be available on lifetime transfers or deaths until 5 April 2025.
  • And the position in relation to BPR is less clear, with no proposed changes to incorporate environmental land usages. It had been hoped that the Government would offer further guidance in relation to whether activities required to run (for example) BNG and Nutrient Neutrality schemes could also be deemed to be trading (as they are for the Woodland Carbon Code and the Peatland Carbon Code).
  • This “mismatch” with BPR could trigger some interesting valuation issues if the land used for environmental purposes is deemed to have a “hope” value above its agricultural / environmental value. The agricultural / environmental value would be covered by APR, but any “hope” value would not. This will provide further food for thought for landowners and advisers alike, particularly as valuations develop in this area.
  • Overall, this is clearly very welcome news, particularly in relation to APR, which will provide some comfort for landowners as they continue to explore opportunities in this area.
  • However, there remain a number of tax uncertainties (not least the treatment of payments received under ecosystem service schemes, and whether they income or capital), and so this feels like the first step along what will inevitably be a long road to an efficient framework for environmental taxation.

The full response can be found here: Government_response_-_taxation_of_environmental_land_management_and_ecosystem_service_markets_w._logo.pdf (publishing.service.gov.uk)